SWINGING mortgage payments isn’t easy in the Bay Area with the incredibly high cost of housing here. That’s why some home buyers are turning to their parents for help with a home loan.

No doubt, any type of loan made to a friend or relative can turn into an ugly mess if the borrower doesn’t pay the money back for one reason or another.

But that doesn’t have to be the case if a formalized private mortgage is used instead of an informal home loan to help buy property. Private mortgages can be used to finance a complete mortgage, as a second mortgage to help with a down payment or to refinance an existing bank mortgage.

Private mortgages, which can be made by either a relative or friend, are legally binding and secured by the underlying real estate. The borrower signs a promissory note that sets out the terms of repaying the mortgage over a set time. The promissory note is secured by the property’s deed of trust filed with the county clerk’s office.

One big advantage that private mortgages have is that interest rates tend to be lower than conventional home loans. After all, it’s unlikely parents are going to charge high interest rates to their children.

The borrower can take advantage of the mortgage-interest deduction on income taxes while the lender has to pay taxes on the interest income.

Lenders have the option of forgiving the loan under the annual gift tax exclusion without facing possible tax consequences. In 2006 the exclusion amount maximum is $12,000. (If the loan was made from a couple, like parents, to another couple, like their son and daughter-in-law, for example, the maximum exclusion amount would be $48,000.

To avoid having to pay taxes on a private mortgage that exceeds the gift tax limit, the Internal Revenue Service requires minimal interest rates. In May, the minimal rate was 4.89 percent for a 30-year, fixed rate loan with monthly payments (see chart).

“It could be a really good deal right now,” said Bill Carlson, a certified financial planner in Belmont. “The interest rate right now for a (traditional) fixed (rate) 30-year loan is well over 6 percent. The child could get a much lower rate from the family.”

Given that some certificates of deposits are on the rise with many offering yields approaching 5 percent or more, it tends to be a better deal for the children than the parents.